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New California law requires employers to collect and report pay data

Executive Compensation|Health and Benefits|Inclusion and Diversity|Total Rewards
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By Stephen Douglas , Rich Gisonny , Laura Rickey and Lindsay Wiggins | November 3, 2020

Employers with 100 or more employees must submit their first report by March 31, 2021, to help identify and reduce racial and gender wage gaps.

California recently enacted a new law (SB 973) that requires covered employers to collect and report pay and hours worked data for each calendar year no later than March 31 of the following year. These new reporting requirements aim to reduce gender and racial pay gaps. The California pay data report is similar to the now-rescinded Component 2 of the federal EEO-1 form that would have required employers to collect and report similar comparable information.

The California law applies to employers with 100 or more employees; however, it is uncertain whether that means 100 or more employees in California or nationwide. It is also unclear, for now, whether the required data must be reported only with respect to California employees.

FAQs

Q. When are reports required to be filed?

The new California law requires employers to submit their first report, covering 2020 calendar-year data, by March 31, 2021; however, due to the scope of the required data, employers will need to start preparing now to file a timely report. Future reports will need to be filed by March 31 of each subsequent year.

Q. Where are the reports filed?

The reports are filed with the California Department of Fair Employment and Housing (DFEH). Employers with multiple establishments are required to submit a report for each one as well as a consolidated report that includes all employees. The law defines an “establishment” as “an economic unit producing goods or services.” Further clarification of this term may be needed.

Q. What data must be collected and reported?

The report to DFEH must include two categories of information, with data submitted in a searchable and sortable format:

  1. Covered employers must report the number of employees by race, ethnicity and sex in each of the federally identified job categories. These categories are executive or senior-level officials and managers, first or midlevel officials and managers, professionals, technicians, sales workers, administrative support workers, craft workers, operatives, laborers and helpers, and service workers. Employers will count employees in these groups by creating a “snapshot pay period” (as described below).
  2. Covered employers are required to report the number of employees by race, ethnicity and sex whose annual earnings fall within each of the pay bands used by the U.S. Bureau of Labor Statistics in the Occupational Employment Statistics survey. The 12 pay bands span from $19,239 and under to $208,000 and over. Employers must submit annual W-2 earnings for each employee in the “snapshot pay period” (as described below), regardless of whether the employee worked a full year. Employers must also report total hours worked by each employee within a given pay band during the reporting year. Reporting the total number of hours worked for exempt employees, or any employees who do not file time sheets or track the specific number of hours worked, will be challenging. It is possible that regulatory guidance will reflect that employers can use a standard number of hours as a default (e.g., 40 hours per week for full-time employees and a lower number for part-time employees) as was done for Component 2.

Note that this information is nearly identical to the information that would have been reported under the federal EEO-1 Component 2 had the Equal Employment Opportunity Commission (EEOC) not suspended such requirement after President Trump took office.

Q. Which employers are covered by the new law?

The new law applies to private employers with 100 or more employees that are required to file the EEO-1 form under federal law. Based on informal comments we received from a California legislative aide, the intent of the new law may have been to cover only employers that have at least 100 employees in California. Some attorneys, however, believe that employers likely will have to count employees located outside of California because this is how some other employment statutes in the state, with a similar employer coverage definition, have been interpreted in the past. In the absence of official guidance on this issue, employers will need to discuss with their legal counsel how to calculate the 100-employee threshold.

Q. Which employees are included in a report?

Employers must submit information based on a snapshot taken from the end of any pay period between October 1 and December 31. The report must account for and include all employees who were active as of that “snapshot pay period,” regardless of whether the employee worked for the employer the entire calendar year. “Employee” is defined to mean “an individual on an employer’s payroll, including a part-time individual, whom the employer is required to include in an EEO-1 Report and for whom the employer is required to withhold federal social security taxes from that individual’s wages.” It is unclear whether this definition would include employees who work outside of California for a California employer. Some commentators have questioned whether the state has legal authority to require California employers to report data on non-California employees, and argue that a narrower scope of the data collection should prevail. In the absence of clarifying guidance, employers should consult with their legal counsel regarding this issue.

Q. What happens with the data?

The law requires the DFEH to make the reports available to the California Division of Labor Standards Enforcement (DLSE) upon request and to maintain the pay data reports for a minimum of 10 years. It also authorizes the DFEH to seek an order requiring non-reporting employers to comply. In addition, the law authorizes the DFEH to “receive, investigate, conciliate, mediate, and prosecute complaints” alleging unlawful wage discrimination practices. The law prohibits any officer or employee of the DFEH or DLSE from making public any individually identifiable information obtained from the report before certain investigations or enforcement proceedings; it also requires the Employment Development Department to provide the DFEH with the names and addresses of all businesses with 100 or more employees.

Q. What concerns have employers raised about the pay data reports?

The new California law faces the same criticisms as the federal EEO-1 Component 2. For instance, some employers have argued that the collection of W-2 earnings will unnecessarily open the door to increased scrutiny and investigations because of the limited opportunities employers have to explain legitimate non-discriminatory reasons for pay disparities (e.g., education, training, experience, tenure, merit). Similarly, the new law does not take into account certain other differences between jobs, such as eligibility for overtime, commissions and bonuses, or employees working less than the entire year or being promoted during the year. Employers may provide “clarifying remarks,” but it is unclear how effectively that will protect employers from misguided enforcement efforts. Employers are also concerned about data privacy as well as the significant amount of time and resources that will be needed to complete a report that may produce data of limited value.

Q. How should employers start preparing?

Employers should begin determining how they will collect the necessary data by:

  • Ensuring that jobs are correctly classified according to the EEOC guidelines
  • Comparing and linking existing pay bands to those used by the Bureau of Labor Statistics
  • Determining how to report hours worked for exempt employees

In addition, employers should consider conducting a pay equity analysis to identify existing wage differences between employees doing “substantially similar work,” evaluate the reasons for the differentials and, where necessary, make adjustments.

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